Higher dividends and share buybacks are squarely back on the agenda as Australian corporates, flush with $65 billion in cash, weigh the merits of mergers and acquisitions against returning funds to investors.

Analysis by AFR Dealbook reveals that, excluding the banks, BHP, News Corp, and Qantas have the largest cash stockpiles among the top 100 listed companies. Credit Suisse identifies Oil Search as having the highest level of cash relative to assets, at 41.9 per cent, followed by OZ Minerals at 38 per cent. (See detailed table below).

In an effort to repair balance sheets Australian companies raised record levels of capital in 2009, with the amount of cash sitting on balance sheets doubling to $65 billion over the past year, according to Goldman Sachs JBWere.

But with the global financial crisis still fresh in the minds of company boards and European debt issues weighing on sentiment, conservatism appears to be winning out. The anticipated spike in M&A activity is yet to occur, prompting increased market banter about dividend increases, special one-off payments, or the return of share buybacks.

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Announced M&A transactions amount to about $US34.6 billion ($38.7 billion) so far this year – up 56 per cent from the same period in 2009 – but still a fair way off peak year-to-date levels of $US43 billion in 2007, Dealogic data shows.

Market participants point to a healthy M&A pipeline, but also note that capital management or expenditure will be a priority for boards if opportunities don’t eventuate. They point to an increased, but still small, number of share buybacks in the second half, and a round of dividend increases.

Head of capital management at Citigroup Karen Phin says while M&A is still a live option for many corporates, others may embark on capital management initiatives with the release of their earnings in August.

“General industrial company boards are happy to be a bit conservative going forward and wait for the right acquisition at the right price . The first consideration is to review their dividend policy," she says. “Then if they’ve got surplus capital they’ll consider a share buyback. For some companies that may be with their results in August, for most companies it will take a bit longer.

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“Boards are quite reluctant to be aggressive and are waiting for the right assets to buy. If they are in that scenario you don’t necessarily activate a very large buyback, you might activate an on-market program."

Companies will obviously opt for the most tax effective way to return funds to shareholders. And some have already got the ball rolling, with Woolworths in the process of buying back $400 million worth of stock, Consolidated Media Holdings proposing a $225 million buyback, and Infigen Energy flagging the commencement of an on market program from May 20.

Woolworths chief executive Michael Luscombe has also noted that more capital initiatives are in the pipeline. News Corp has outlined its options as being increasing dividends, buying back shares, investing in the businesses or making “opportunistic investments." The company will detail its plan before its next earnings release.

The major banks, which are also sitting on sizable cash stockpiles, are unlikely to return capital to shareholders until there is clarity on global capital and liquidity rules being proposed by the Basel Committee on Banking Supervision.

“It is anchoring down on their return on equity by having too much cash on balance sheet. Institutions will express views," he says, adding however that there wouldn’t be an aggressive agitation for a return of capital in the near term.

Xiradis identifies OZ Minerals and News Corp as potential buyback candidates, and says Wesfarmers may opt for a buyback or dividend increase.

“Dividends will be ratcheted up at the margin not aggressively . . . despite the fact that corporate Australia is the healthiest it’s been in decades.

“In the short term, given the level of uncertainty, boards and companies are being conservative in their actions, but that can’t last forever, in part given that valuations are coming back to incredibly attractive levels."

Analysts and strategists note that there is plenty of scope for dividend increases.

“In aggregate ASX 200 companies have paid-out an average of around 45 per cent of earnings this year down from around 60 per cent in previous years," Goldman Sachs JBWere strategist Matthew Ross says. “Higher dividends and a return of buy-back programs could be an increasing feature of markets."

“Against a stronger macro-economic back drop, companies will no doubt be reassessing whether the more conservative pay-out ratios they adopted during the crisis are still appropriate."